SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: September 23, 1997
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
(Exact name of registrant as specified in charter)
New York 1-1217 13-5009340
(State of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
4 Irving Place, New York, NY 10003
(Address of principal executive offices)
Registrant's telephone number: (212) 460-4600
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INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
PSC SETTLEMENT AGREEMENT
The New York State Public Service Commission ("PSC"), by order issued and
effective May 20, 1996 in its "Competitive Opportunities" proceeding, endorsed a
fundamental restructuring of the electric utility industry in New York State,
based on competition in the generation and energy services sectors of the
industry. On March 13, 1997, Con Edison, the PSC staff and certain other parties
to the proceeding entered into a settlement agreement, dated March 12, 1997,
with respect to the proceeding. On August 20, 1997, the PSC requested the
parties to negotiate certain modifications to the March 1997 settlement
agreement. On August 29, 1997, Con Edison, the PSC staff and certain other
parties entered into a modified settlement agreement.
The PSC, by order issued and effective September 23, 1997, approved an
amended and restated settlement agreement, dated September 19, 1997, between Con
Edison, the PSC staff and certain other parties (the "Settlement Agreement").
The order provides that the PSC's approval of the Settlement Agreement is
subject to certain conditions, including that (i) Con Edison be the energy
supplier of last resort during the Transition (defined below) until relieved of
that obligation, (ii) the PSC may require auctions for the divestiture to third
parties or transfer to a Con Edison affiliate of generation plant and may
subject affiliates of Con Edison to whatever limitations the PSC determines are
necessary for any market participant following the PSC examination of market
power issues in connection with the divestiture plan (See "Divestiture
Commitment," below), and (iii) Con Edison be committed to cooperate in the
development of the infrastructure (e.g., the independent system operator, etc.)
needed to allow competition in New York.
The Settlement Agreement provides for a transition to a competitive
electric market by instituting "retail access," a rate plan for the period
ending March 31, 2002 (the "Transition"), a reasonable opportunity to recover
prior utility investments and commitments that may not be recoverable in a
competitive electric market (often referred to as "strandable" costs), the
divestiture by Con Edison to unaffiliated third parties of at least 50 percent
of its New York City fossil-fueled generating capacity and, subject to Con
Edison shareholder and other approvals, a corporate reorganization into a
holding company structure.
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The Settlement Agreement reflects the following significant amendments to
the August 1997 modified settlement agreement:
- the reductions to generation-related revenues that Con Edison will
provide over the Transition will increase from $890 million to
approximately $1 billion. (These amounts are exclusive of additional
revenue reductions from lower gross receipt taxes.)
- the revenues applicable to the delivery service provided by Con Edison
for the New York Power Authority will be increased by $45 million
over the Transition.
- Con Edison will retain for its shareholders the first $50 million of
any net after-tax gains, calculated in accordance with the
Settlement Agreement, from the divestiture of generating capacity.
In addition, any additional net gains from the divestiture, or
transfer to an affiliate of Con Edison, of generating capacity
during the Transition will be deferred for disposition by the PSC.
- the additional depreciation that Con Edison will provide for its
generating units will be reduced from $110 million to $75 million,
and Con Edison will spend an additional $35 million on SBC Programs
(defined below).
Con Edison expects to discontinue the use of Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation" for, and apply the standards in SFAS No. 101, "Regulated
Enterprises-Accounting for the Discontinuation of Application of FASB Statement
No. 71" to, the separable portion of its business that is being deregulated as a
result of the Settlement Agreement (the "Deregulated Portion"). Con Edison does
not expect that discontinuation of SFAS No. 71 for the Deregulated Portion will
have a material adverse effect on Con Edison's financial position.
The following is a summary of the material provisions of the Settlement
Agreement, including those provisions that remain unchanged from the August 1997
modified settlement agreement, and is qualified in its entirety by reference to
the Settlement Agreement, a copy of which is filed as an exhibit to this report.
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Retail Access. Con Edison will implement an energy and capacity retail access
program that will permit its customers to choose alternative energy suppliers.
The delivery of electricity to customers will continue to be through the
Company's transmission and distribution systems. The program will begin by June
1998 with up to 500 megawatts of customer load. This schedule is contingent upon
timely approval of a retail access implementation plan and retail access tariffs
to be filed by Con Edison with the PSC and the Federal Energy Regulatory
Commission ("FERC"), as applicable. The program will be expanded in increments
and Con Edison will target the phase-in of retail access to make it available to
all of its customers by the earlier of 18 months after an independent system
operator (the "ISO"), which is to administer the wholesale electric market in
New York, becomes fully operational or December 31, 2001. This schedule is
subject to adjustment as circumstances warrant. In general, Con Edison's
delivery rates for retail access customers during the Transition will equal the
rate applicable to other comparable Con Edison customers less a rate
representing the market value of the energy and capacity being supplied for
customers by the other sellers.
Rate Plan. The rate plan reduces the generation-related revenues that Con
Edison would have received over the Transition had rate levels in effect on
March 31, 1997 remained in effect by approximately $1 billion, exclusive of
additional revenue reductions from lower gross receipts taxes (or approximately,
$1.2 billion including such additional reductions). The gross receipts tax
reductions will result from lower customer billingsunder the rate plan and from
a law enacted in July 1997 to reduce the New York State gross receipts tax.
Financing savings from any securitization of strandable costs (see "Recovery of
Prior Investments and Commitments," below), in excess of the amount of such
savings, if any, that is allocated by the PSC for SBC Programs (defined below),
and any further reductions in New York State utility taxes will be utilized for
additional rate reductions. In general, base electric rates will not otherwise
be changed during the Transition except in the event of changes in costs above
anticipated annual levels resulting from legal or regulatory requirements
(including a requirement or interpretation resulting in Con Edison's refunding
its tax-exempt debt), inflation in excess of a 4 percent annual rate, property
tax increases and environmental costs, or in the event Con Edison's rate of
return becomes unreasonable for the provision of safe and adequate service.
The Settlement Agreement also provides, among other things, for a
non-bypassable system benefits charge to recover, to the extent not otherwise
recovered, the costs of required research and development, energy efficiency
programs, programs to assist low-income customers and environmental protection
programs (collectively, "SBC Programs"). In addition, the Settlement Agreement
includes a penalty mechanism (estimated maximum, $26 million per year) for
failure to maintain certain service quality and reliability standards.
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For any rate year during the Transition, 50 percent of any earnings in
excess of a rate of return of 12.9 percent on electric common equity will be
retained for shareholders and 50 percent will be applied for customer benefit,
with one-half of the amount to be applied to a reduction of rates or as
otherwise determined by the PSC and the balance to be deferred and applied to
reduce the Company's generating plant balances through additional depreciation
expense. The rate of return calculation will exclude any incentives and reflect
any amounts by which the rate of return for earlier Transition rate years fell
below 11.9 percent. This earnings sharing will end beginning in the year in
which Con Edison fulfills its divestiture commitment (see "Divestiture
Commitment," below) or in which 15 percent of the service area peak load
(excluding the existing load served by the New York Power Authority) is supplied
other than by Con Edison.
The Settlement Agreement supersedes the provisions of Con Edison's 1995
electric rate agreement prescribing overall electric revenue levels for the 12
months ending March 31, 1998. The Settlement Agreement also eliminates the
provisions of the 1995 electric rate agreement for incentives or penalties
related to the Enlightened Energy program and customer service performance, the
Electric Revenue Adjustment and related Revenue per Customer mechanisms (the
"modified ERAM"), earnings sharing and reconciliation of amounts included in
base rates with actual costs for pensions and other post-employment benefits,
capacity charges under Con Edison's contracts with non-utility generators of
electricity ("NUGs"), Enlightened Energy program and renewable energy expenses,
property taxes and research and development expenses. The Settlement Agreement
also requires the reversal of all related balances on Con Edison's books of
account at March 31, 1997, the net effect of which is not material. An
incentive-based fuel adjustment clause, initially similar to the partial
pass-through fuel adjustment clause under the 1995 electric rate agreement, will
be in effect during the Transition.
Divestiture Commitment. Con Edison has agreed to divest to unaffiliated third
parties at least 50 percent of its New York City fossil-fueled generating
capacity no later than December 2002, unless the PSC determines that such
divestiture should be delayed or reduced (to maximize sales price or address
other developments). Divestiture could also be delayed under certain other
circumstances. Con Edison fossil-fueled generating units not divested to
unaffiliated third parties will be transferred to an unregulated affiliate of
Con Edison by December 2002.
Con Edison has agreed to submit a detailed divestiture plan to the PSC by
March 1998 and, unless otherwise justified in the divestiture plan, to initiate
the divestiture process with respect to at least 30 percent of its New York City
fossil-fueled generating capacity within 90 days after PSC approval of the
divestiture plan. The PSC could approve the divestiture plan as submitted or
modify it to address market power or other concerns.
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Con Edison will retain for its shareholders the first $50 million of any
net after-tax gains, calculated in accordance with the Settlement Agreement,
from the divestiture of generating capacity. Any additional net gains, or net
losses, from the divestiture, or transfer to an affiliate of Con Edison, of
generating capacity during the Transition will be deferred for disposition by
the PSC. After the Transition, the difference between the remaining book cost of
generating plant and the "`market values' defined by divestiture" will be
reflected in the strandable costs to be recovered following the Transition. (See
"Recovery of Prior Utility Investments and Commitments," below.)
Recovery of Prior Investments and Commitments. Potential strandable costs for
Con Edison are those prior utility investments and commitments that may not be
recoverable in a competitive retail electric market. Investments for which there
could be strandable costs include Con Edison's fossil-fueled generating plants
and Con Edison's Indian Point 2 nuclear generating unit. Commitments for which
there could be strandable costs include decommissioning of Con Edison's nuclear
generating operations and charges under Con Edison's contracts with NUGs.
During the Transition, Con Edison will continue to recover its potential
electric strandable costs in the rates it charges all customers. Con Edison will
also provide for $75 million of additional depreciation for its fossil-fueled
generating units. In addition, as indicated above, certain "excess" earnings
will be applied as an offset to strandable costs. (See "Rate Plan," above.)
Following the Transition, Con Edison will be given a reasonable
opportunity to recover remaining electric strandable costs, as adjusted for net
gains in excess of $50 million or net losses from divestiture or transfer of Con
Edison generating capacity (see "Divestiture Commitment," above), including a
reasonable return on investments, through a non-bypassable charge to customers.
For remaining fossil-related strandable costs, the recovery period will be 10
years and for the Indian Point 2 nuclear unit, the recovery period will be the
then-remaining life of the unit. With respect to its NUG contracts, Con Edison
will be permitted to recover at least 90 percent of the amount by which the
actual costs of its purchases under the contracts exceed market value after the
Transition. Any potential disallowance after the Transition will be limited to
the lower of (i) 10 percent of the above-market costs or (ii) $300 million (in
2002 dollars). The potential disallowance will be offset by NUG contract
mitigation achieved by Con Edison after April 1, 1997 and 10 percent of the
gross proceeds of generating unit sales to third parties. Con Edison will be
permitted a reasonable opportunity to recover any costs subject to disallowance
that are not offset by these two factors if it makes good faith efforts in
implementing provisions of the Settlement Agreement leading to the development
of a competitive electric market in its service territory and the development of
an ISO.
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Financing savings from any "securitization" of Con Edison's strandable
costs, in excess of the amount of such savings, if any, that is allocated by the
PSC for SBC Programs, are expected to be applied to further reduce customer
rates. Subject to satisfying any conditions of any securitization legislation
enacted in New York State, Con Edison could transfer its right to recover from
customers the payment for the strandable costs to a financing entity that would
in return remit to Con Edison the proceeds of debt issued by the financing
entity. The debt, which would be non-recourse to Con Edison, would be secured
by, and repaid from, the future customer payments.
Corporate Structure. The Settlement Agreement authorizes Con Edison to create a
holding company and establishes guidelines governing transactions among
affiliates. The formation of the holding company is subject to the approval of
Con Edison's shareholders, approval of FERC and the consent of the Nuclear
Regulatory Commission.
Upon formation of the holding company, Con Edison will become a subsidiary
of the holding company, and Con Edison's common shareholders will automatically
become the shareholders of the holding company. Con Edison's existing
subsidiaries, Consolidated Edison Solutions, Inc. (formerly ProMark Energy,
Inc., "CE Solutions") and Consolidated Edison Development, Inc.(formerly
Gramercy Development, Inc., "CE Development") will be transferred to the holding
company. CE Solutions was formed by Con Edison in 1993 to market gas and related
services, and is expanding its operations to become a full-service energy
service company. CE Development was formed by Con Edison in late 1996 to invest
in energy infrastructure development projects and the marketing of Con Edison's
technical services. It is expected that CE Development will develop other
opportunities in both the energy and non-energy fields domestically and
internationally. The holding company may establish other subsidiaries from time
to time, including one or more subsidiary holding companies to hold its Con
Edison stock and the stock of other subsidiaries.
The Settlement Agreement limits the dividends that Con Edison could pay to
the holding company to not more than 100 percent of income available for
dividends calculated on a two-year rolling average basis. Excluded from "income
available for dividends" will be non-cash charges to income resulting from
accounting changes or charges to income resulting from significant unanticipated
events. The limitation will not apply to dividends necessary to transfer to the
holding company proceeds from major transactions, such as asset sales, or to
dividends reducing Con Edison's capital ratio to a level appropriate to Con
Edison's business risk.
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Without PSC approval, Con Edison is prohibited from making loans to, or
guaranteeing the obligations of, the holding company or any other subsidiary of
the holding company, or pledging its assets as security for the indebtedness of
the holding company or any affiliate of the holding company. Con Edison and the
holding company's other subsidiaries must operate as separate entities, and
transfers of assets, services and information between Con Edison and its
affiliates are subject to certain restrictions. Con Edison and the holding
company's other subsidiaries must have separate operating employees, and
non-administrative operating officers of Con Edison may not be operating
officers of any of the holding company's other subsidiaries. Transfers of
employees from Con Edison to the holding company's other subsidiaries are also
restricted.
Litigation. Pursuant to the Settlement Agreement, Con Edison will terminate an
appeal of the November 1996 rejection by the Supreme Court of the State of New
York of a challenge to the PSC's May 20, 1996 order.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Exhibits
10 Amended and Restated Agreement and Settlement, dated September 19, 1997,
between Consolidated Edison Company of New York, Inc. and the Staff of the New
York State Public Service Commission (without Appendices).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC.
By: JOHN F. CIOFFI
JOHN F. CIOFFI
Vice President and Controller
DATE: September 24, 1997